NCPA - National Center for Policy Analysis

Growing Economies Adopt Supply-Side Policies

October 1, 1996

Supply-side economics was abandoned by North America, Europe and Japan in the 1990s, says economist Alan Reynolds, but it was enthusiastically embraced by the frisky economic tigers of Asia and elsewhere.

All of the most rapidly growing economies, without exception, have one thing in common says Reynolds: they either had very low tax rates to begin with or have moved rapidly in that direction

  • In the 1980s more than 50 countries, including the United States, reduced their highest marginal tax rates.
  • In the 1990s, the largest economies reversed course, and tax rates were increased in the United States, Canada, Germany and Japan.
  • But 13 countries either kept their highest tax rates at 20 to 35 percent throughout the '90s, or continued to move in the direction of reducing punitive tax rates.
  • From 1985 to 1993, the economies of countries that reduced tax rates grew at four times the pace of those that did not.

Many of these recent economic miracles were in dire economic straits before the tax rates started coming down. For example,

  • The economies of South Korea, Mauritius and Jamaica were falling fast in the early '80s.
  • Mauritius is now called "the Hong Kong of Africa" since cutting the top tax rates in half.
  • More recent economic basket cases such as Peru and Bolivia have likewise shown dramatic improvement since slashing high tax rates.

Private consumption and investment, a good measure of living standards, has increased at three times the U.S. pace in Hong Kong, Singapore and most other economies that adopted some version of the supply-side tax strategy.

 

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